Last time we looked at Baby Step 2, paying off all your debt using the debt snowball. You take your bills, put them in order from smallest amount to largest amount, and proceed to pay them off one by one, snowballing the amounts until the debts are gone!

Baby Step 3 – 3 To 6 Months Of Expenses In Savings

In baby step 1 we built up a $1000 emergency fund in order to protect us from life's little emergencies. In baby step 3 we are going to take our emergency fund to the next level, and continue building it until you have at least 3-6 months of expenses saved up. Dave Ramsey calls it the “fully funded emergency fund of 3-6 months of living expenses“.

Why do you need to build up your balance in your emergency account? This larger balance will allow you to build up an umbrella to keep you protected from the storms of life. Because life events WILL happen. When you have a fully funded emergency fund, you're less likely to ever have to go into debt again.

When you have a fully funded emergency fund of 3-6 months, there aren't many things that can happen that would cause you to be in immediate danger. Lose a job? You'll be able to cut back and cover your mortgage long enough to find another job. Have your appendix rupture? You'll be able to cover your large health insurance deductible.

Having that large emergency fund will help mitigate the risk of unplanned negative events – of which we will all have encounters with many times in our lifetimes.

Why Are Emergency Funds So Important?

I've heard a lot of people say that they think this emergency fund of 3-6 moths is too large (we thought it was too small and have saved closed to 8-10 months of expenses), and they can't imagine ever having to use that much money to fix a problem. Why not instead invest the money or use it for a vacation?

Money magazine says that 78% of us will have a major negative event happen in any given 10-year period of time.

Here are just a few of the reasons why we've saved up our emergency fund.

Negative events DO Happen: As the quote on this page says, 78% of us will have a major negative event happen in any given 10 year period. Those are pretty good odds.

Less Stress: When you have an emergency fund to fall back on, there is a lot less stress worrying about how you're going to pay the bills.

Risk Is Managed: An emergency fund (along with other things like health insurance, disability insurance and life insurance) will give you a situation where you have substantially less risk of having a bad situation turn into a horrible one. A hospitalization won’t turn into bankruptcy, and a job loss won’t turn into a foreclosure. Plan for problems, before they happen. Don't allow problems you could have planned for turn into life changing events.

How Much Is Enough?

When talking about a fully funded emergency fund, you'll need to talk with your family about how much you want to save. Ramsey suggests that you save 3-6 months of expenses, but that can obviously change based upon your situation. Factors to take into account include number of children, job stability and other factors. For example, if you're expecting to be laid off, you'll probably want to save up as much cash as fast as you can. In a stable job with no kids? A smaller amount might work. The very baseline amount that Dave Ramsey speaks of is 3-6 months of expenses.

How much should you save? An example: If your family has a minimum of $2500 in expenses every month after cutting out all the un-necessary bills, your 3-6 months of expenses would come out to anywhere from $7500-$15,000.

At our house we like the peace of mind that comes with the emergency fund, plus we have a child – so we have saved up 10 months in our emergency fund currently. Figure out the correct amount for your family and situation.

Can I Invest My 3-6 Months Of Savings?

One question that often comes up is this – “Should I invest my emergency fund in a CD, or a mutual fund?”. Usually the answer to that would be no – you want to keep the emergency fund pretty liquid, and accessible. That's the reason for the emergency fund – for unplanned and unexpected emergencies!

Personally I prefer to save the bulk of my money is a good high-yield savings account, like the ones offered by Ally Bank. I then keep $1000 in my local bricks and mortar bank as well just in case I need it in a hurry.

Don’t put your emergency fund in things where you can't get at it fast – like real estate, mutual funds or by investing in a cousin's business. Keep your emergency fund liquid!

Do you think saving up 3-6 months of expenses is enough? How much do you have saved in your large emergency fund? Do you prefer to use credit cards as your emergency fund? Tell us your thoughts in the comments.

You save up that baby emergency fund in order to insure yourself against the risk of life's little emergencies that have a way of popping up at the least opportune time. If you don't save up that money as an insurance policy, you can be assured that your plan to get out of debt will be set back many times over by many little “emergencies”.

If you have an emergency fund saved, no new debt is created, and you just take the time to re-stock that emergency fund in case of further expenses.

Today we will look at Baby Step 2, paying off all debt using the debt snowball.

Pay Off Your Debt Using The Debt Snowball

Now that you’ve got your $1000 emergency fund saved, it's time to get intense about paying off all your debt. Dave Ramsey likes to call this getting “gazelle intense”, in reference to the bursts of speed and intensity a gazelle will use in order to get away from a cheetah (or in our case, debt).

For many people this step is the longest in your 7 baby steps.

If you’ve built up a lot of debt over the years in the form of student loans, auto loans, credit card debt and other things, it probably took you a long time to get so far in the hole, and it will take quite a while to dig your way back out. But you CAN get back out!

If you're not so far in the hole, getting out of debt can happen a lot quicker, and you can get on to the next steps of building up a larger emergency fund, paying off your home early, building wealth and giving more.

If you've gotten this far and you haven't done a budget yet, now would be the time to get started.

Figure out where you are in regards to your income, expenses and your debt obligations. Do a zero based budget and make sure that every dollar is accounted for – because every extra dollar is now going to be going to debt reduction.

Once you’ve got all of your income, expenses and debt listed, follow these steps to get rid of your non-mortgage debt. (Mortgage debt is paid off separately in another baby step, so exclude it for now)

The Debt Snowball

Here is a rundown of the debt snowball plan.

Put all your debts in order from the smallest balance to the largest balance.

After you have paid for food, clothing, transportation and a roof over your head (the necessities), pay the minimum paymentson all of your debts.

Put any extra money left over towards paying off the smallest debt first.

Pay off your smallest debt, and then “snowball” the money you were paying on that debt over to the next largest debt.

Continue paying off the next largest debt, and when that one is complete, roll it all over to the next largest debt until you are completed.

That's not too hard, right? Just pay off your debts from smallest to largest until they are all paid off!

While a credit score isn't the be-all and end-all of your financial snapshot, it can still be rather helpful as you keep tabs on your overall financial situation.

While it might cost you money to access a more “official” credit score, there are plenty of ways that you can get a general idea of how you are doing when you use some of the free resources available for credit scores.

Free Credit Scores

There are ways to get free credit scores, including having a loan rejected. However, if you don't want to apply for credit just to see where you stand in terms of your credit, there are sites where you can see your free credit score.

Credit Karma: TransUnion score, as well as your VantageScore and even your insurance score.

Turbo from Intuit: Transunion score is supplied by Turbo, as well as a variety of helpful financial information about you and tips for your situation.

eCredable: You won't get a consumer credit score like you're used to, but you will get an idea of where you might stand with the help of the credit rating simulator.

It's important to note that these free credit scores aren't “official.” It's not what lenders see when they pull your credit. And they aren't scores that you would get if you paid for your score at myFICO.com. However, these free scores can give you a good idea of whether or not you are making progress with your finances.

Track Your Financial Progress

For the most part, free resources are best used to keep tabs on your general situation. You can use these resources to see whether or not you have good credit in general, as well as see where you could improve. Additionally, if you notice a sudden drop in your score on one of these sites, it could be an indication that there is something very wrong with your credit (including identity theft). Monitoring your situation can alert you to possible problems that you might need to address quickly.

If you think that the issue might be identity theft, you should check your credit report as soon as possible. If you haven't checked in the last 12 months, you should log on to annualcreditreport.com to get a report from each of the three major bureaus for free. Even if you aren't eligible for a free report right now, it is still worth it to pay to access your report if you think that your identity might be at risk.

Keep an eye on your situation, and you can watch it improve. Many of these sites offer insights into where you stand in comparison to others, as well as providing tips for improving your credit situation. If you are looking to take control of your financial situation, these free resources can actually be quite helpful. Get an idea of where your finances are going, and you'll be in a better position to improve your situation.

Do you know of any other free resources to keep tabs on your credit? Tell us in the comments.

For my first real post on this personal finance blog I thought it would be appropriate to talk about one of the people who have influenced my financial life the most, Dave Ramsey.

For those of you who don't know, Dave Ramsey is a personal finance guru who has a daily radio and TV show, in addition to personal finance seminar called Financial Peace University.

Dave Ramsey is extremely popular, and most of his radio and TV shows focus on helping people who have gotten themselves deep into debt, and need help in finding a way out. One of the biggest ways they end up getting out of debt is by following his 7 Baby Steps plan.

Dave Ramsey’s 7 Baby Steps

Step 1 – $1,000 to start an Emergency Fund: The first step asks you to save up a bit of “just in case” money – in other words – some money for just in case the unexpected happens. What kind of unexpected things? Things like flat tires, doctor bills, and a furnace going out in the dead of winter will be covered by this small emergency fund.

Step 2 – Pay off all debt using the Debt Snowball: List your debts from smallest to largest. Pay the minimums on all of the debts. With money left over after you pay the minimums, you pay extra on your smallest debt – until it is paid off completely. Once you pay off the smallest debt, you then start paying on the next smallest debt.

Step 5 –College funding for children: Save up some money for your kids education. I don't think you should pay for all of it, but some is good.

Step 6 – Pay off home early: Make some extra mortgage payments to pay down the principal and own your house faster!

Step 7 – Build wealth and give! (Invest in mutual funds and real estate): Continue building wealth through mutual funds and real estate, and more importantly give til you can't give no more!

When you write it down it seems like it would be so simple to get out of debt and start building wealth, but Ramsey is the first to tell you that it takes a lot of hard work and “gazelle intensity” in order to find your way out of the depths of debt.

I know personally that his plan can work as my wife and I have used it to get out of debt. Is it a perfect plan for absolutely every situation? Maybe not. But it does work for a majority of those who try it and stick to it.

Over the coming days and weeks I'm going to do a series of posts talking about Dave Ramsey's 7 Baby Steps, one by one. I hope that in talking about it I can give some hope to some of you out there who are looking for a way out.

What do you think of the 7 baby steps? Have you used the plan? Would you recommend it to others? Tell me what you think in the comments and welcome!

Unfortunately, there is some confusion over what is likely to affect your credit score. A recent survey from TransUnion indicates that there are some major points of confusion for many consumers when it comes to their credit score.

Are You Confused About What Affects Your Credit Score?

The TransUnion survey identified some common points of confusion for many consumers and strives to clarify some of the confusion. Here are some of the main misconceptions that consumers have when it comes to credit scoring:

Cell Phone and Rent Payments Affect Your Credit Score: According to the survey, 45 percent of respondents thought that rent directly affected their credit scores. At the same time, 47 percent thought that cell phone payments directly affect scores.

The reality is that, while some credit bureaus and even FICO are toying with the idea of including some non-traditional information in their models, right now credit scores aren't directly affected by these payments. If you miss payments, your account can be turned over to collections, and that will drag your score down, but right now positive payments aren't often reported and used to figure your credit score.

Income Matters for your Credit Score: It would be nice to think that, as your income improves, so does your credit score. In fact, 48 percent of respondents to the TransUnion survey assumed that a pay raise would help credit scores.

However, this isn't the case. Your income is not considered a factor in determining your credit score. How much debt you carry relative to your available credit matters, but your income isn't a factor. You're better off making sure that you pay on time and keep your debt low — no matter how much you make — than hoping that a pay increase will save your credit score.

Credit Inquiries and Your Credit Score: Many consumers are also confused about how credit inquiries affect their scores. About 40 percent don't understand the connection, and some believe that checking their own scores will cause a problem.

If you apply for credit, your score could be impacted. However, if you check your own credit score, nothing will change about your score. There is confusion about other inquiries as well, though. Sometimes telecom companies and others look at your score, and they way the look might have different impacts. It's best to ask before you agree to an inquiry.

In the end, understanding how your credit score is figured can be a big help to you as you plan ahead. Before making a major purchase that requires a loan, such as a home, you need to make sure that you have good credit. Staying on top of the situation can benefit you later.

Approximately 15 million people a year are victims of identity scams. The financial toll from these victimizations is near $50 billion. Identity theft is a growing epidemic around the world, and people need to learn how to protect themselves before they become victims without even knowing it.

CBS published an article about a retired Connecticut US Army soldier named John Harrison. A few years prior to his retirement a man named Jerry Wayne Phillips stole his military I.D. and went on a shopping spree. He shopped at major home repair stores, bought high ticket electronics and even purchased new cars. Over 65 different accounts were created in Harrison’s name.

Within just four months Phillips had run up a tab of around $265,000 under Harrison’s name. Today Harrison still has $140,000 in debt he cannot clear which prevents him from personal purchasing, borrowing, and even opening a checking account.

Protecting Yourself From Identity Theft

As overwhelming as it may seem, there are some simple things you can do to protect yourself from identity theft. One thing you can do is to put a fraud alert or credit freeze on your credit cards with all three major credit bureaus. There are three different types of fraud alerts that can be used to warn your creditors of potential crimes against your identity.

90 day fraud alert.

Extended fraud alert.

Active military duty alert.

With a credit freeze you can control who can have access to your credit report and when, which allows you to block potential thieves from gaining access to it.

Contacting The 3 Credit Bureaus

You can contact the 3 credit agencies to put a freeze on your account at the numbers or websites below.

You can also ask to add a victim’s statement to each of your credit bureau reports asking creditors to call you personally to verify all credit applications made in your name.

Use Third Party Services To Protect Yourself

Another smart thing you can do is to work with professional services like LexisNexis identity management. They have the tools, staff, and expertise to work with credit services and watch your accounts. They also help by preventing fraudulent payments, and work with government agencies to reduce abuse.

Identity theft insurance is also now available to help with prevention and protection for consumers. Because these are fairly new services however, it is warned that customers take the time to make sure the insurance being offered will appropriately cover the type of loss you may have as a customer. You may also want to check with your existing insurance agencies as they may already have some kind of policy in place as a part of your current agreement.

Others Dealing With ID Theft

Identity theft can affect you in many ways, just like it did Malcolm Byrd:

I.D. was stolen by a drug dealer with a record.

Pulled over, handcuffed by police.

Lost his part-time and full-time jobs for not having disclosed a criminal record (which wasn’t his).

Denied unemployment because of criminal record.

His driver’s license was suspended for not paying fines (racked up by thief).

Loaned niece his car- she was pulled over and questioned.

Arrested at his home and jailed for 2 days.

Identity theft is a crime that can cripple you for life. It can have a ripple affect with your finances and personal identification that can cause you endless problems. Take the time and make sure your take some of these simple steps to protect yourself and your I.D.

Have you ever had to deal with identity theft? Tell us about it in the comments!

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